K-39 System

[Leth]

K39 - The Last Stochastic Technique

A study published in "The Encyclopedia of Technical Market Indicators" found that some very good signals were given by an un-smoothed 39 period stochastic oscillator (K = 39, no signal line). A buy signal is generated when K crosses above 50% and the closing price is above the previous week's high close. Sell and/or sell short signals are created when the K line crosses below 50% and the closing price is below the previous week's low close. Taking a longer period, and not smoothing the data over a 3-period moving average allows the analyst to view Lane's Stochastic.

In the chart below for MSFT, we see that the 39 period K crossed above 50% on June 14, at around $36.00.

stochastic-msft2.png

Weekly, Daily and Hourly through Minute data can all be used effectively for the 39 period stochastic. Using weekly data for three years, we see that the 39-Week Stochastic for MSFT didn't cross below 50% until late February, 2000.

stochastic-msft3.png

The whipsaw that occurred for MSFT the following month shows the need for signal confirmation. If we look at CSCO for the last year on daily data, we see that by the 39 day stochastic, it was a hold from November 1999 at $17 through early April 2000 at $32 a share. Here again, we see a false rally at the end of April. What can be used for confirmation?

stochastic-csco1.png

Since the Stochastic is a price momentum indicator, one should pair it with a volume assessment for trade confirmation. In the chart below, the On Balance Volume (OBV) indicator has been added along with a 30 day MA as a signal line.

stochastic-csco2.png

Notice that there was a bullish OBV crossover in early November 1999 and again in early June 2000 soon after the K line moved back above 50%. Although the Last Stochastic reversed in April, the OBV crossover did not occur. When the K line moved above 50% again in early June, confirmation soon followed.

One last point to remember is that all stocks are unique, and while the 39 period Stochastic is a useful technical indicator, one should always map the performance against your specific stock. Recently, most Tech stocks have evidenced a tendency to signal entry at a K crossover above 40% and a sell with K crossing below 60%. However, in volatile equities a second price or sentiment indicator along with a volume indicator provides the best confirmation.

[Soverus Khan]

Has this ben coded in SF? I may try my hand at it over the next few days just to see # of stocks on a daily basis.

Also, Leth...when was this written?

[Leth]

Khan...

I believe it was written in 2002. I havent tested it though. If you decide to test it...let us know how it turns out my friend.



Leth